Franchising Insight Weight-Loss Franchises Pursue Fat Profits

Provided by

Looking for a can't-lose business concept? Several franchise systems are cashing in on Americans' battle with their weight.

Sometimes franchising seems to have two faces--and both come with double chins. On one side we have thousands of fast--and not so fast--food restaurants enticing people to devour frightening quantities of calories. On the other side are a dozen or so franchise systems trying to help consumers lose the pounds they just gained.

According to the June 16, 2003, issue of U.S. News & World Report magazine, Americans are now spending about $40 billion a year on weight-loss products, programs and diet aids. One billion dollars of that money goes straight to Weight Watchers International, the Woodbury, N.Y., company that started as a franchise years ago and now is a publicly traded behemoth, with 44,000 weekly meetings in 30 countries. But it's too late to run one, because Weight Watchers stopped selling franchises and is buying up the 26% of U.S. locations that are still owned by franchisees.

It isn't too late, however, to own a franchise that helps chubby consumers attempt to lose weight by eating healthy meals, exercising, chewing "fat burning" gum, or even being hypnotized. But the history of weight-loss franchises is, to say the least, spotty.

Jenny Craig, in La Jolla, Calif., was the market leader in the early 1990s, then shed profits and lost scores of franchisees after getting involved with the fen-phen scandal and hiring Monica Lewinsky as a spokesperson (the middle-aged customers were appalled).

And the Diet Center and Physicians Weight Loss Centers of America, both owned by the Health Management Group in Akron, Ohio, have all the stability of a yo-yo dieter. One hundred and sixty franchisees have left the Diet Center since 1999, and Physicians Weight Loss stopped prescribing appetite-suppressant drugs in March, according to director of franchise development Krishna McCollins, 31. However, it still promotes them on its Web site.

Entrancing Concepts

Then, of course, there's the hype. Franchisees of both the Diet Center and a third Health Management Group concept, Form-YOU-3 Weight International, sell $1.99 packs of "24 hour Thermogenics Chewing Gum," that's supposed to help customers "reduce their appetites and burn fat more efficiently." And the 40 U. S. franchisees, plus 20 more in Canada, of Positive Changes Hypnosis Centers, in Virginia Beach, Va., promote their services in full-page newspaper ads with headlines like "I Melted Away 71 lbs. With Hypnosis."

Such tactics may be necessary for Positive Changes. According to Dr. David Spiegel, director of the Department of Psychiatry and Behavioral Sciences at Stanford University, about 10% to 15% of the population is highly susceptible to hypnosis. Franchisees must grab the attention of the susceptible few who also happen to be overweight and willing to pay an upfront fee of $2,000 or more for a year of hypnosis sessions and nutrition classes.

Franchisees don't have to be hypnotists themselves, but must hire hypnotists certified in the Positive Changes method. And that method is certainly different. Clients lean back in comfy chairs, don special eyeglasses and headphones and close their eyes. The glasses come alive, sending light, color and movement through their eyelids and, presumably, into their brains, while soft music plays on one headphone track and a hypnotist's voice comes through on the other. The voice urges the client to picture herself at her ideal weight and provides suggestions on how to get there.

Sandra Glowinke, 58, a customer of the Positive Changes franchise in Naperville, Ill., says she lost 21 pounds in just nine weeks on the program. "I don't know why it's working, but it is," she says.

Inside, franchisees Lauren Phelps, 51, and Sylvia Runkle, 61, say the business end of their franchise works because a low investment can bring high returns. Franchisees pay a $29,000 franchise fee for a protected territory of several hundred thousand people, and make another investment of about $100,000 to rent offices, buy light and sound machines and hire staff. Royalties are 5%, and there's a national ad fee of 1%. Besides clients like Ms. Glowinke, who are 40 or more pounds overweight and must sign on for a full year, other customers pay a few hundred dollars for short-term hypnosis to help them quit smoking, lose fewer pounds, or ease stress. Ms. Runkle and Ms. Phelps say each of their four Chicago-area centers serve 275 to 455 new clients each year. Franchisees also make money when clients buy their own $200 light-and-sound machines and the tapes ($15) from their personal hypnosis sessions, which they are encouraged to play while falling asleep each night.

The partners won't disclose how much they're earning, but Ms. Phelps, a former attorney, says she didn't take a pay cut when she left her law practice. Franchisee Sharon Austin, 60, says her Positive Changes center in Northampton, Mass., does so well that she opened another in West Springfield with her profits.

The margins are much thinner at Seattle Sutton's Healthy Eating in Ottawa, Ill. Seattle--"It's my real name"--Sutton, 71, is a former nurse who started preparing low-calorie, low-sodium meals for the patients of her doctor husband in 1985. She's since expanded into a 25,000-square-foot kitchen "that can be duplicated anywhere" and sells almost 150,000 meals each week throughout the Midwest. She started franchising in 2001. Franchisees pay a $35,000 fee for her recipes and methods, plus 5% royalties, and must invest about $1 million to build, equip and staff their own kitchen facilities.

A Low-Cal Concept

The cost is so daunting that Ms. Sutton's first franchisees, a couple in Omaha, ran out of money before they got started. Another couple, Stephanie Keegan, 34, and her husband Jim, 36, spent about $750,000 to open their franchise in St. Paul, Minn., in March 2002 and started breaking even this January. "The key is in volume," Ms. Keegan says. The couple employs 12 people to prepare 21 fresh meals each week for their 350 customers. A refrigerated truck carries those 7,350 entrees in two deliveries a week to 16 distributors in the area. A typical day's menu includes French toast with apples for breakfast, a chicken salsa sandwich for lunch and orange roughy with rice and parsleyed carrots for dinner. Customers, who pay $95 a week for 1,200 calories a day or $110 for the 2,000 calorie option (same food, but larger quantities), may pick up their food on Mondays and Thursdays from the distributors' offices or, for an extra fee, have it delivered. Any customer who loses 100 pounds on the plan gets a personal phone call from Ms. Sutton, and a check for $100.

Several other franchise systems tackle weight loss by exercise, and fitness centers like Lady of America in Fort Lauderdale, have doubled their franchisee count in four years. But the champion is Waco, Texas-based Curves, which opens a new franchise every four hours. Curves's 4,500 franchisees, who operate almost 6,000 centers, are mostly women who were first members at other Curves centers.

Curves CEO Gary Heavin, 47, says he designed Curves 11 years ago "as a place where women could get a compete workout in 30 minutes in a comfortable environment." Mr. Heavin's idea of comfort is no frills--centers are located in strip malls and contain none of the regular amenities of private gyms, like locker rooms and showers. Instead, each center contains a circle of hydraulic-resistence machines where participants exercise a muscle group, like biceps and triceps, for 30 seconds, then jog in place for 30 seconds before moving on to the next machine. An entire workout, including stretching, takes half an hour, and women are encouraged to return three times a week.

The $20,000 fee Mr. Heavin charges to open a new Curves includes all training and equipment. "We'll even send a mentor to help with the first week," he said. Franchisees must spend an additional $6,000 or so to rent and spruce up a storefront. Royalties are $395 a month. Because each new member pays an initiation fee, of around $75, and pays about $30 a month--in advance--to use the facilities, it's not unusual for franchisees to earn their investments back in the first week, says Nancy Lund, 41, of Minneapolis. Ms. Lund, who opened her first Curves in 2001, now has seven centers in Minnesota and Illinois, including one with 900 members.

Questions to Ask

Weight-loss franchise numbers, just like fast food, sound enticing, but Mark Siebert, president of the iFranchise Group consultancy in Chicago, advises anyone considering a weight-loss franchise to first determine whether the business provides a real consumer benefit. In other words, do customers really lose weight--and keep it off? Getting an honest answer will be tricky, because the owners of all these franchises will happily provide you with testimonials from satisfied, newly thin clients.

To find out if their business model is the exception, you'll have to spend time talking to former and existing franchisees and their customers. What is the dropout rate for each program? Have complaints been filed against the franchise with the Better Business Bureau? Has the franchise been the target of consumer litigation?

Edward Kushell, president of the Franchise Consulting Group in Los Angeles, says a fringe franchise like Positive Changes must be investigated carefully. "This isn't like a pizza business where you can find out about how other pizza businesses have done," he says. "Who are the people behind it? Do they should have experience in franchising as well as in their industry? How well-funded are they?"

Finally, is the franchise a fad or does it have staying power like Weight Watchers? If Monica Lewinsky could damage a strong system like Jenny Craig, what might bad publicity do to a weight-loss system that depends on chewing gum or flashing lights?

From StartupJournal.com
Copyright © 2004 Dow Jones & Company, Inc. All Rights Reserved